Justin invests $4,000 in a savings account for two years. The account pays 2% interest compounded annually. How much interest income will Justin earn on this investment?
A) $80.00
B) $81.60
C) $160.00
D) $161.60

Question

Quizplus · Accepted Answer

The interest earned on the investment can be calculated using the formula for compound interest: A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest, P is the principal amount ($4,000), r is the annual interest rate (2% or 0.02), n is the number of times that interest is compounded per year (1, since it's compounded annually), and t is the time the money is invested for (2 years). Plugging in the values: A = 4000(1 + 0.02/1)^(1*2) = 4000(1.02)^2 = 4000*1.0404 = $4161.60. The interest earned is the final amount minus the principal: $4161.60 - $4000 = $161.60.

Justin Invests $4,000 in a Savings Account for Two Years